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Jul 18, 2007

The Legal Line

Ed Maldonado

Dear Ed,Our business is in both prepaid calling cards and prepaid VoIP residential phone services. This past March, I read several news articles that the federal court of appeals upheld the FCC’s total preemption of state regulation of VoIP in the case of Vonage. I assumed that aside from federal USF reporting, we were unregulated under state requirements so long as it was VoIP. Then, we got official notices from state PUCs asking for, among other things, E-911 registrations, complaint follow-ups, and the need to have certification to offer both services beginning in May 2007. Our first reaction was to disregard the whole lot, or respond in writing that we were VoIP and preempted from this kind of regulation and hassle. Our corporate attorney (not really a telecom guy) said that this was a mistake because his research showed that VoIP services were not totally preempted by the FCC’s Vonage Order. He said our prepaid cards were still regulated by the PUCs, and possibly even our IP residential phone services. This did not make sense to me. I have asked several of our VoIP wholesalers and even our soft switch manufacturer about it, and still have no clear answer. Is the corporate attorney correct? Please clarify this because the responses to notices are coming up due.SincerelyREG’D or NOTDear REG’D:Actually, your Attorney’s research is correct as to Court Rulings on FCC Orders related to VoIP, Vonage, and USF Contributions on VoIP. The Appeals Court’s March ruling should not be interpreted in a vacuum, and does not equate to a black or white conclusion that all VoIP is unregulated. The truth is that the 8th Circuit Court drew some very fine lines in its March Ruling that will likely be the basis for future State regulation of VoIP. This was re-addressed in a later decision by the DC Circuit Court of Appeals, when it upheld the FCC’s Order related to the contribution of USF from VoIP providers. The topic and both rulings by the respective Courts have been widely covered in many news channels - so I’m not going to dissect these Rulings item by item. Instead, I’d rather give you a regulatory history primer to help you see where the regulations may be going from this point forward. This should help you to respond to both your Attorney and those Notices. As you stated, the Federal Court of Appeals for the 8th Circuit ruled this past March that the FCC met Constitutional requirements when it preempted regulation by the State of Minnesota over Vonage in its 2004 Vonage Order. If you remember the original case, the State of Minnesota sought to classify Vonage’s services as telephone services for regulatory purposes because of intrastate implications of the residential service. The FCC took jurisdiction over the matter and declared that due to the “nomadic” nature of the Vonage service, it was difficult to make traditional determinations of what was interstate or intrastate in order to define the nature of the service. The FCC ruled that because of this blurred nature of the service, the FCC and not the states was in the best position to pass regulation over VoIP, and not create a conflicting or patchy regulatory schema. The FCC then “deferred” the determination of what was an “information service” and what was a “telecommunication service” in the Vonage service offering, but made it clear that the FCC would use “a light touch” regulatory policy to preserve market growth where appropriate. Vonage appealed the FCC Order, under claims that the FCC acted in an arbitrary and capricious manner when it did not define telecommunications or information service under the Telecom Act; when it found it was impractical or impossible to separate the intrastate components of VoIP; when it determined state regulation conflicted with federal regulatory policies; when it preempted emergency 911 telephone service requirements; and when it left alone the issue of cable companies. This appeal thereafter went on its normal course (which can be a long process), within the federal 8th Circuit courts, which covers Minnesota. That was in 2004.Now let’s jump forward to June 2006, when the FCC ruled that VoIP Resellers and Interconnected VoIP providers are to be contributors to the Universal Service Fund. Between this time, and the original 2004 Vonage Order, E-911 requirements have been mandated by the FCC defining that residential VoIP programs, like Vonage, must offer access to local emergency services. There is no exception by virtue of a disclaimer for long distance service use only – it’s an all-encompassing requirement under the “Interconnected VoIP” provider definition. This same (Interconnected VoIP Provider) definition is now used to validate USF Contributions from VoIP providers and compliance under the 2006 CALEA Order. So the FCC did not take this classification lightly. It is also important to note here, that in the FCC’s 2006 Order for USF contributions, it specifically states that the preemptive effects found in the prior Vonage Order would not be available to VoIP providers that can track the geographic endpoints of their customers’ calls.The FCC’s 2006 USF Order, and its regulatory regime were immediately appealed by Vonage in the Washington DC Federal Court of Appeals under claims that the FCC exceeded its authority under the Act by arbitrarily and capriciously equating VoIP to Wire Line toll service, for the purposes of setting the presumptive percentage of VoIP revenues generated interstate or internationally; requiring pre-approval for traffic studies submitted by VoIP providers but not for those submitted by wireless providers; and by suspending the “carrier’s carrier rule” for VoIP. The problem is that reporting and safe harbor requirements for VoIP and USF go into effect much sooner than any results may return from an appeal. Under Form 499, VoIP providers are now asked to break out their interstate and intrastate traffic, or use the safe harbor percentage of 64.9% for USF assessment purposes. VoIP providers now must make choices: report interstate and international revenues separate from intrastate, use the safe harbor which seems to presume an intrastate/interstate combination existing, or just hold on to the idea that it is an unregulated field and not report – at least until the Letter of Inquiry arrives from the FCC Enforcement Bureau. Against this backdrop came the March 2007 Vonage Order ruling by the Federal 8th Circuit Court of Appeals which reinforced the principle that the FCC’s Order was justified to preempt the states’ regulatory power based in part on the principle that Vonage’s services were nomadic in nature and could not be easily divided into interstate and intrastate traffic. Subsequently, on June 1st 2007, the DC Court of Appeals upheld the 2006 FCC Order requiring VoIP resellers and Interconnected VoIP providers to contribute to USF. By this same time, the first 499-A reports and contributions were due from VoIP resellers and Interconnected VoIP providers, either using actual interstate/intrastate break out or the safe harbor percentage.Do you see where this is going, REG’D? I hope so. I think you may need to re-evaluate your company’s policy of state preemption on VoIP. To do this, you need to sit down with your attorney, who although not versed in telecom, appears to be on point, and review how you have, or will, report on Form 499. Your calling cards are a service regulated in many states regardless whether you use VoIP or not. In any case, re-read the articles that are out there on this topic before deciding to not comply or respond to any state Notice of Non-Compliance or an actual Complaint. Should your attorney have any questions, I am always available.Good Luck and Success in the Industry.Attorney Edward A. Maldonado is President of the Regnum Group, Inc. and the Maldonado Group. He can be reached

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